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  June 4th, 2024 | Written by

Increasing Insurance Risks for Marine Shipping 

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Marine insurance, hull and cargo specifically, is one of the oldest forms of insurance according to researchers and industry professionals alike. The basics of coverage date back over four thousand years to the Babylonians. Given the nature of marine shipping, the entire transit journey carries agreed levels of uncertainty and when unexpected issues, such as war or natural disasters strike, the process becomes upended. One geographic region can have an outsized impact across the globe, as current issues in the Red Sea and Black Sea – not to mention the rise of piracy in the Indian Ocean and weather problems in the Panama Canal – all demonstrate. This confluence is causing delays, complicating logistics and blowing up budgets. While these matters are not new to marine shipping (weather for one, is a continual factor), the effects are exacerbated because they are happening concurrently, creating a “butterfly effect” across the globe.

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Perhaps the most pressing challenge facing the industry is the conflict in the Red Sea. Since October 2023, conflict with the Houthis has been a lethal problem for cargo ships attempting to pass through the Suez Canal. A report from the United Nations Conference on Trade and Development found that in January 2024, there was a 42% decrease in ships passing through the Suez Canal to avoid the conflict. While some ships are granted safe passage based on nationality, there are no guarantees for the thousands of others regularly passing through the canal. 

Cargo crews and their ships have two options for their rerouted journeys. The first is to go around the African continent at the Cape of Good Hope, adding at least 10 days to their travel time (and considerable additional expense). However, this option is not available on every route. The second is to pass through the conflict zone in the Red Sea, which many companies have opted to do with an added war risk insurance and unsurprisingly an increased cost. Both options come with rate increases that most shipping companies had not previously budgeted (previously, rates were sitting around .05% and now hover around 1%).

Rates are also increasing in the Indian Ocean, as pirates in the area are growing more brazen, commandeering larger ships and attacking vessels that are farther out to sea. This increase in frequency and area of strikes is challenging even for larger cargo. War risk rates in the Indian Ocean show a similar increase to the ones in the Red Sea, up to around 1%. 

While shipping in the Eastern Hemisphere faces conflict issues, the Western Hemisphere is having problems with low water levels in the Panama Canal wreaking havoc on shipping timelines. El Niño, the weather pattern that drastically affects the climate in Central America and surrounding areas, coupled with a devastating drought in the region has caused water levels to drop in the nearby Gatún Lake which forms a major part of the Panama Canal. As a result, there is not enough water in the canal’s complex lock system. Every time a ship goes through the lock system more water is dumped back into the ocean, thereby causing additional water loss in the lake. To mitigate the water level issue, officials at the Panama Canal have limited the number of ships that can pass through the canal daily. However, this well-intentioned measure has created a backlog of ships waiting to cross, and crews who need to pass through the canal now need to budget for increased transit time, more supplies, and crew. Marine shipping companies traveling through the Panama Canal should consider increased delay and delivery limits to offset the potential exposures while waiting to pass through the canal. 

As these factors affect marine shipping, the shippers of the cargo should better understand their options to navigate the issue areas. Depending on the destination, journey length, ship owner, and more, shippers for the cargo can decide which strategy makes the most sense, and what risks they are willing to take. The marine shipping industry can mitigate transit risks and exposures through a combination of insurance coverages, increased limits and carefully crafted policies. A good insurance broker will collaborate with their shipper of the cargo client to identify policies that should be added or removed depending on the issues a ship might face on its journey. As frustrating as these issues are for everyone involved, there will be gradual change to resolve these problems, and marine shipping will sail again to its standard operation.